Ted Simons:
Tonight on “Horizon,” state lawmakers are still working out kinks from the current year's budget, as well as working on next year's numbers. How will the Obama stimulus package work into the spending plan? Find out from the two top legislative leaders, next on “Horizon.”

Ted Simons:
Hello, and welcome to “Horizon,” I’m Ted Simons. Arizona is going to get $3 billion from the Obama stimulus package over the next two years. But state lawmakers may leave some of that money on the table because of strings attached. Meanwhile, Arizona senators John McCain and Jon Kyl held a joint press conference this morning, one day before president Obama arrives in the Valley to explain his stimulus plan. The two senators ripped the package, saying it does not address the housing problem. Here now to talk about how it may fit into state plans and other issues, here are senate president Bob Burns and house speaker Kirk Adams.

Ted Simons:
Before we get to stimuluses and/or stimuli, with the correct plural, the 2009 fix needs to be fixed. How much fixing needs to be done?

Kirk Adams:
The revenue numbers for January were 21% off of our projections. It went to 1.6, and now it looks closer to $1.9 billion. We knew there was a distinct possibility, if not a probability, that at some point we will have to come in and make further adjustments.

Ted Simons:
That’s how you see it from the senate side, as well?

Kirk Adams:
Yes.

Bob Burns:
We anticipated a problem, in addition to the revenue problem. There was a hard push to get this thing in place to prevent us going into a cash flow deficit. The treasurer's office has been warning us of some problems that could have occurred this month maybe and for sure in March if we didn't get something out soon. So, with the push to get that done, we were aware there might be some things we would have to come back and update.

Ted Simons:
How is that affecting the 2010 negotiations?

Bob Burns:
Well, from the senate's standpoint, and I think the house, too, because the appropriations committees are meeting jointly -- they are continuing to go forward with evaluations and collecting information relative to the 2010. As far as the 2009 update, there's the need for the house, the senate and the Governor's office to get back together and figure out exactly what we do there, and whether or not we might need another special session in order to get it done.

Ted Simons:
Are you thinking a special session might be necessary?

Kirk Adams:
Well, it's certainly a possibility. Another possibility is we could get the 2009 and the 2010 done. We may be in the neighborhood of $300 million short of the update we did in January. Like President Burns said, we're continuing to work on both of these problems at the same time. The budget is a primary focus of the work we're doing.

Ted Simons:
How much impact are you getting from the Governor's office?

Kirk Adams:
Senator Burns and I have met with the Governor on numerous occasions. We continue to work with the Governor's office and we have every reason to believe that will be a productive relationship.

Ted Simons:
Is that the kind of thing, though; would you like to see a little more out of the Governor's office right now?

Bob Burns:
Well, I think we would, but they came in under some extreme circumstances. There were a tremendous number of people they had to put in place with the transition, and immediately we were hit with the 2009 budget problem. They are really in catch-up mode, still. If we could have our wish, we would wish there was more interaction at this point. But with the situation as it is, I can understand why it's a real problem.

Ted Simons:
We have the white house now coming out and saying Arizona should get about $3 billion of stimulus money over the next couple of years. First of all, are those the numbers you are getting? And secondly, should Arizona accept this federal money?

Kirk Adams:
Well, the Joint Legislative Budget Committee or the JLBC is in the process right now of going through this bill line by line, determining exactly how it affects or general fund budget. There will be moneys that come to Arizona that won't affect our ability to balance this general fund. They are going through that analysis right now. My understanding of the way this legislation was written -- this thousand-page bill -- the Governor has to choose to apply for these federal funds, it's an application process. I don't know what the criteria are for determining when those funds come or how much of those funds that come are predestinated for Arizona. But clearly we view these moneys as an opportunity for transition money, to allow to us transition us to slowly get state government to the point where it needs to get so our revenues match our expenditures. Remember, this was a probability over a six-year period of time. It's going to be extremely difficult for us to balance the structural deficit, now $3 billion, perhaps even more, in one year's time. So this will be a staged withdrawal, if you will, from the spending levels that we've had over the last six years.

Ted Simons:
We want to get back to the time frame of how long this problem has been going on and when it may have started and what may have caused the problem. The fact of who doles out the money, is that your understanding, it'll all siphon through the Governor's office?

Bob Burns:
I basically found that out about a half hour ago before we came over here. I've set a policy in place that we're not going to hear any bills until the budget is finished. We're going break up the stimulus package into separate components, and then have presentations and staff doing an analysis on each one of those components, and try to figure out exactly what we really do have in this package and how it's going to be -- how we're going to be able to take advantage of it.

Ted Simons:
There are voices, when I asked should we accept the money; there are voices who say we should not accept this money, especially those coming from the Republican side. How do you feel about it?

Bob Burns:
Well, I think that's part of this process, we have to look. I think there is the potential for it to cause harm to us. If it's one-time money and it increases ongoing programs or we are required to increase ongoing programs if we accept that money, that's a problem. We are obviously in a situation already where we can't match our revenues to our expenditures. Our ongoing expenditures far exceed our revenue. We all hope it creates a stimulus as it's advertised to do, and that economic activity starts to pick up, which then obviously helps our revenue side. If we are trying to solve ongoing problems with one-time money, I think we have to be very careful.

Kirk Adams:
I think it's important to remember that this federal money does nothing to resolve the $3 billion structural deficit. This deficit is not just for the current fiscal year, and the next fiscal year, but also 2011, and possibly as long as 2012. So if we accept this money -- and once we get a thorough vetting of the bill, any strings attached, we'll have a better understanding of all that. But it could potentially give us the opportunity to transition over a several-year period of time. Two, three, maybe even four years, so that our state spending matches our state revenues. Ultimately that's why we are in the problem that we're in today, because we have not done a good job of balancing that structural deficit.

Ted Simons:
Let’s talk about ways in which that deficit could be balanced. One of the ideas being floated out there -- and again, the Governor's office is certainly not putting the kibosh on this, it's been evolving from there, finger -- a tax increase. First of all, should a tax increase be put to a vote of the people?

Kirk Adams:
Well, I’ve had several conversations with the Governor. And not in any of the conversations I’ve had with the Governor has she indicated she was going to be supporting a tax increase. There was a story in the "Arizona Republic" that seemed to intimate that she would be. I can't tell you right now if that's the case. But I think we have to be extremely careful at raising taxes in a deep recession, because that could be a real danger to the economy. Not even Harry Reed or Nancy Pelosi attempted to raise taxes at this time in our economy. If you look at the story in the Arizona Republic on Saturday, which seemed to indicate a movement towards an additional penny sales tax, we have to realize that would mean every Arizona city would have a higher sales tax rate than New York City or Los Angeles. It would be the largest tax increase in terms of real dollars ever. So we have to proceed extremely cautiously. I know from the house perspective, that's a bit like pushing a piano uphill. We have to look at everything. I think it's important that we do that. But raising taxes at this time in our economy, it's not going to help the small business owners and the business community to hire people again to help them purchase new equipment, and get our economy moving again.

Ted Simons:
Should that be put to a vote of the people?

Bob Burns:
Well, I think we have to evaluate that whole situation. I'm very concerned that if we were to go out and put a tax increase on this economy, we could end up in worse shape than we're already in. You know, I think we get into this situation of focusing way too much on state government. There's a lot more to Arizona than just state government. There's a whole other world out of state government. Those are the people who produce the revenues that keep state government functioning. We have to be very careful how we impact those folks. And a tax increase would be a real detriment to them, I believe.

Ted Simons:
Would it make sense for a sales tax increase -- which hits everyone, including those who can least afford it -- would it make sense to implement something like that and not look at tax credits, loop holes and someone described them, some of which might help alleviate the situation, as opposed to a tax increase which is going hit everyone?

Bob Burns:
When we start looking at the so-called tax loopholes, and the credit areas, it ends up being in the eye of the beholder. You have to look on a case-by-case basis. Some of them might have to be rolled back. Typically we do tax credits to encourage employers to move into the state of Arizona to help our economy. So to go back on a deal we have made with some employer who has moved here and is helping us, would be a real bad message to send.

Kirk Adams:
I also think this is somewhat of a false argument. You look for example at sales tax. Best case scenario: a new penny sale’s tax will raise $800 million. In this economic environment, closer to $600 million. Take the best case scenario, $800 million. That still doesn't solve our budget problem. If you eliminated all the tax credits we have in the state of Arizona, it still won't come close to solving our budget problem. There seems to be this false idea out there that there's an easy solution, a silver bullet: just raise taxes and we won't have to make any cuts and we'll balance our budget. That simply is not true. The facts do not support that.

Ted Simons:
It's interesting, because I know the other side, we hear about it all the time, e-mails and conversation all the time saying that Republicans set silver bullet at tax cuts; the solution to everything is tax cuts. Even when the state coffers are empty, the best idea is tax cuts. How do you respond to that? An ASU study showing that tax cutting in the past 15 years may very well have throwed where we are now, a different viewpoint from the one you may have referred to earlier, they are looking back 15 years and are saying the state has done so much tax cutting the cupboards are bare. How do you respond?

Kirk Adams:
I think that's false. The state has not done a lot in tax-cutting. We have one of the highest corporate income tax rates in the west United States. We have one of the highest business personal property tax rates. We don't index capital gains like the federal government does. We have a very high commercial real property tax rate. If you want to diversify our economy you not only need a qualified workforce, you also need a tax and regulatory environment that will attract new capital to Arizona and create new jobs. We are uncompetitive in that regard. Here's our golden opportunity. Look what our neighboring state California, look what they're going through right now. They are talking about massive tax increases, massive deregulations. They are creating an environment in California that could be ripe for a state like Arizona to attract new businesses, new jobs, and new capital. I agree 100% with Bob. We have got to not be so myopic, so self-centered. We tend to do that sometimes in state government; we want to look at our projection balance or budget. We're going to raise tax sentence what about the rest of the economy the rest of the people out there?

Ted Simons:
There are more to tax cuts than corporations and businesses. There's individual tax-cutting, as well as. Do you believe tax cuts across the spectrum in the past 15 years or so, as this one report seems to indicate, saying the 2 and a half some odd billion dollars in money after inflation and population growth have been put in there, have we gone too far on one side and need to balance on the other?

Bob Burns:
I think we have gone too far on one side, and that's the spending side. I believe in fiscal years six and seven, when we had 19 and 20% growth, there were a lot of people advising us that this was a spike, a one-time increase in revenue that we could not sustain. Our -- our average income growth has been around the 7% range. When we go in to spend 20, 19 and 20% increases and put it into ongoing programs, that can't be sustained. That's what we've gotten into. And then on top of all that, the economy goes south. So we've got really the double whammy. In my opinion it can be laid at the feet of the overspending.

Ted Simons:
Governor Napolitano would be on the program once a month and she was very good at stating her positions and be very forceful; as I’m sure you're aware. But basically what she would say repeatedly, yes, there was a push a lot of spending going on, because we had to catch up because of the years before in which not enough money was coming in, not enough revenue. Your response.

Bob Burns:
Well again, we focused on spending in state government, as opposed to doing the things that Kirk has talked about, of attracting businesses in here to improve our economy and produce additional revenue for us, as opposed to just spending in state government. I think there just was not enough emphasis on being more business friendly, more employer friendly, to get employees high-paying jobs into the state of Arizona.

Ted Simons:
Quickly, there's a line of thinking as far as we want to get to higher education right now. The idea being that a better-educated workforce, which might mean a little more in government spending, two universities, whatever, that better-educated workforce is an attractive element to a business.

Kirk Adams:
Oh, of course it is. I don't think you can have one without the other. You have to have a qualified workforce a supply the smart people that can take high-wage, high-paying jobs. No one here is disputing that. At the same time have you to have a tax environment that will attract new capital. When you're a company looking to relocate, we're not just competing with California, New Mexico, Utah, Nevada, Idaho; we're competing with places like Singapore. And we’ve got to be more competitive in attracting more business capitol to this state. If the goal is to create new high-paying jobs, a very important component of attracting those jobs is what's it going to cost those businesses to locate here? I'll give you a great example. Intel recently announced a $3 billion investment in their Chandler plant. It was only about three or four years ago we passed sales factor tax reduction, essentially, that benefited a manufacturer like Intel. It is no coincidence that this short time later, Intel is choosing to take their capital and pour $3 billion into the ground here in Arizona. If we want to attract that type of investment, we have to mind our Ps and Qs when it comes to investment.

Ted Simons:
And also and I know that ASU President Michael Crow spoke in front of a Joint Appropriations Committee meeting here, I believe it was last Thursday, and he talked about further cuts to higher education spending specifically to ASU. Here’s what Michael Crow had to say.

Michael Crow:
If we were to receive half of the reduction proposed in the chairman's recommendations, for FY2010, lest just say that was the outcome, I don't know what it is -- let's say we were to receive half. That would reduce our per-student funding back to levels earlier than 1992, 1993, 1994, somewhere in that range. When you think about what we're doing, our institution -- it is extremely difficult to think about how we're going manage the institution. Doesn't mean we can't figure it out. Without constantly tuition increases or changes to the very fabric of the institution itself, at funding levels that are 16 years in the past, relative to students. I'm talking about actual dollars here, not real dollars, because it's even more substantial in real dollars.

Ted Simons:
The idea that ASU is now at 1998 funding. And if the numbers he was looking at there go through, next year's budget gets you back down to 1992. That is acceptable?

Bob Burns:
Part of the problem, I think he's only looking at the general fund portion of the funding for the universities. If you look at the overall funding, you don't see quite the same picture. We don't want to go in and cut hard on the universities, but we end up with our hands tied through the voter initiatives which have protected things in k-12 education or in health care. When we're $3 billion in deficit, and we can't touch certain areas of the budget, including all of the federal funds that come into the state, two thirds of what gets spent in the state of Arizona, there's not a lot of wiggle room for us at the legislature to go to where the funds are available to make the reductions we need to make in order to get in balance. This is something that is very difficult for us to do.

Kirk Adams:
I also think it's important to point out that while President Crow's numbers regarding per-pupil funding may be accurate, I think it's also important to realize that even with the recent cuts made, ASU or all university funding is back to 2007 levels. What Dr. Crow is referring to is this disparate we have between the three universities. ASU being the largest, its per-people funding has always been lower than the other universities. The opportunity that we have through this crisis is to take fundamental look at our universities and identify their specific missions and how we can get them there. This is a great opportunity for reform to; benefit the universities in the long run. I think that's our shared goal, is through this time of crisis, what we can do on the other end to strengthen, not only higher education, but also k-12 education.

Ted Simons:
Is that something that the legislature should be taking the lead on? Or is it something an ASU, UofA, NAU president should be taking the lead on?

Kirk Adams:
I think we should all do it together. This problem is monumental. There's never been a legislature in Arizona that's faced the challenge that we're facing today. We can't solve it on our own and we have reached out to the board of regents, the university presidents, and have asked for their help, help us do this, help us figure this out. I think with their help we can get this done. Again, I want to emphasize, this is our opportunity to institute fundamental reforms. What do we want our universities to look like five years from now? What role do we want them to play in our economy 10 years from now? These are very, very important issues. For every dark cloud, this is the silver lining. We have an opportunity for good reform.

Ted Simons:
Is there an opportunity for silver lining as well, that Arizona’s tax-based, business based lack of diversity in terms of overall business needs to be finally addressed? Hey, we have to broaden things; we can't be so focused on one thing and go boom and bust.

Bob Burns:
Well, I think it is an opportunity to do that. Hopefully that's something we can get our arms around. This issue has been brought up in the past. To go back to the university assistance, it's my understanding that the state of Arizona has a tremendous wealth in natural resources. Some of those are basically locked up. So I think that we can call on the universities to give us some assistance and how do we unlock some of these natural resources that are available to us here in the state of Arizona?

Ted Simons:
I’ve got about a minute left. Again, the idea that it's boom, bust, real estate, construction, development, and maybe tourism and so little else. Is that going to change?

Kirk Adams:
Absolutely. This must be a priority. This is one of those silver linings. If we don't do it now when the boom times return we'll forget about where we've been. This is our chance to fundamentally reform Arizona’s economy by instituting those policies in the areas of qualified workforce, particularly with the universities, and attracting new business capital. Through tax reform, they are looking at the university system and what we want it to be; we create ourselves as a magazine net to attract the business capital out of the state of Arizona. President Burns is committed to this, as well. This is our chance to do it. I hope we get the support from the business community and the universities, as well.

Ted Simons:
Gentlemen, thank you very much for joining us on “Horizon.”

Bob Burns:
Thank you.

Ted Simons:
Tomorrow we'll talk to Arizona senator Jon Kyl. He'll have more to say about the Obama stimulus package. Also we’ll give you an update on the legislature, that’s Wednesday on “Horizon.” Thursday I talk to Representative Harry Mitchell and Friday, another edition of the "journalists roundtable." that is it for now. Thank you so much for joining us. I'm Ted Simons. You have a great evening.